Alibaba and the 2,236 thieves

China’s top e-commerce firm fights to win back customers’ trust

THE founders of eBay used to say that their real accomplishment was neither their clever technology nor the marketplace they created. Rather, it was to build trust between people who had never met.

Alibaba, China's leading e-commerce platform, faces the same challenge, but more so. It operates in a country where fraud is rife. And it has grown at a dizzying pace: 56m people use its business-to-business website, it claims, and 370m use Taobao, its online mall. This week it ran into trouble. On February 21st, in a filing with the Hong Kong Stock Exchange, Alibaba admitted that it had granted “gold” status (a mark of supposed integrity) to 2,236 dealers who it says subsequently defrauded buyers.

David Wei, the chief executive of Alibaba.com (the listed part of Alibaba Group, which is mostly private) and Elvis Lee, the chief operating officer, resigned to accept responsibility. Neither was personally implicated, but the company said an internal investigation had found that about 100 sales staff and “a number of supervisors and sales managers” were “directly responsible in either intentionally or negligently allowing the fraudsters to evade” various controls.

The frauds started coming to light in 2009. The company set up a compensation fund, which has so far paid out $1.7m to 2,249 buyers. More claims are inevitable, and Alibaba has not yet offered an estimate as to how much it will have to pay out. Whatever the number, it will be dwarfed by the damage to Alibaba's reputation as a place to find reliable Chinese suppliers and buyers.

The scandal has generated conflicting responses. One view, which the company favours, is that Alibaba's reaction demonstrates its underlying integrity. It investigated the reports of fraud thoroughly and was forthcoming in publishing details, in sharp contrast to some other scandal-tainted Chinese firms.

Sceptics retort that Alibaba had little choice. The scams struck at the heart of its brand. Traders on its website who pay a fee and submit to third-party checking can be labelled “gold” suppliers. This tells buyers that they are trustworthy. Had Alibaba done nothing, this verification system would quickly have become worthless. As it was, the firm's shares dropped nearly 15% after the announcement.

Alibaba's internal investigation attributed the fraud to “the pursuit of short-term financial gain at all cost” by salespeople and others. No doubt, but it emerged at a time when Alibaba's broader business prospects have seemed to be dimming. The firm has been wooing new customers at a terrific pace, but even before the scandal broke its shares had fallen by more than half from the bubbly days of 2007.

Unlike Western e-commerce platforms, Alibaba charges no commission on sales, making its money from extras such as fees for gold status. A new rival, DHgate, charges 3% of the value of each transaction. If it is viable, it may be because a market is developing between global suppliers and buyers that is more conventional in some ways—the two sides know one another—but modern in others, in that payments that once had to go through a bank can now be made online. In a market as rapidly evolving as Chinese e-commerce, no company has a secure franchise.

The high-profile chairman of Alibaba Group, Jack Ma, issued a letter saying that the firm would prosper only by “holding on to our ideals and our principles”. Despite his vocal determination to put his house in order, customers may not be entirely reassured.